Global Agenda: Flummoxed

Stock markets have been doing well recently, although few have been as consistently strong as the American ones.

By PINCHAS LANDAU
Stock markets have been doing well recently, although few have been as consistently strong as the American ones. Since the latter are the biggest and most closely watched, they provide the tone to the rest of the world, and the music has been increasingly upbeat.
The Dow Jones Industrial Average was the last of all the important equity-market indices to move past the high point it hit in January of this year, before the short-but-sharp correction of mid-January to early February – but it finally did so on Wednesday.
That means that all the main indices have reached new “recovery highs” – with “recovery” relating to the period since the market slump ended last March. The scale of the rally over the past year has been the largest of its sort ever recorded, so perhaps it is not surprising that records are being broken in many parts of the market. For example, the price of futures contracts on the S&P 500 index rose 12 successive days through Wednesday, breaking its previous record – which was made in January 1987.
A newer financial instrument, the VIX index, which measures the degree of volatility in the market, fell 17 out of 19 days, another record. Since the VIX is nicknamed the “fear index,” its consistent decline signals the steadily growing sense of confidence about the equity market, at least among traders and short-term investors.
The size of the rise over the last six weeks, since the end of the last correction, has not been very big in percentage terms. But its steady, almost remorseless nature has had a crushing effect on the community of market “bears” – the analysts who believe the market is set to fall.
Seeing these itty-bitty rises carry on day after day has clearly been too much for many bears. Most are openly confused, not to say flummoxed. They had believed and predicted that the markets would drop – and many of them expected a major crash. Instead they are faced with a minor, but ongoing, rise.
Many bearish newsletter writers have announced that they are covering their shorts and “sidelining” themselves. They stress that they haven’t been converted to the bull camp, but they can’t figure out why the market is behaving as it is. Since they accept that you can’t fight the market, they are simply getting out of the way, to watch and wait from the sidelines.
On the other hand, the bulls – while obviously very pleased to see the market moving up and, especially, making new highs and thereby “confirming” that the rally is still alive and well – are more than a little puzzled themselves. It’s easy to see why: Although the bottom line is that the market keeps rising, the trading volume has been consistently mediocre and, on some days, exceptionally low.
Nor is there very clear “leadership” in the market: One day, it’s the financials that are making the running, the next day its oils and the third day technology stocks. Nowhere is there any sense of passion, let alone great power. Pretty much everyone thinks the market is “overbought” by now, meaning that it ought to at least fall back a bit, instead of rising relentlessly.
But there seem to be very few sellers around to push it down – yet there aren’t many buyers either. The general public has finally begun to put some money into equity-oriented mutual funds, but it continues to pour huge amounts into bond mutual funds. March is set to be the 12th consecutive month that bond funds take in more than $25 billion – another record, and one that proclaims deep distrust of the equity market on the part of John Q and Jane Public.
Many analysts, of all stripes, tend to seek solace or inspiration (whichever they are looking for) in historical comparisons. The annals have therefore been closely examined to find periods displaying similar patterns of behavior. The results, however, have been predictably mixed: There are instances that provide great encouragement to the bulls, but others that provide hope to the bears.
The run-up in the S&P 500 in January 1987 was followed by several more months of rising prices – although, of course, later that year came Black Monday. But the current pattern can also be detected in several periods immediately prior to major market slumps, including September-October 2007 and August 2000.
So, as usual, you pay your money and you make your choice – or you just shut your eyes and hope for the best. It’s not a sophisticated investment strategy, but currently no one has anything more convincing to offer.
landaup@netvision.net.il